captioning sponsored by macneil/lehrer productions >> lehrer: good evening. i'm jim lehrer. four million people are now homeless and twice that many need relief, in pakistan's gigantic flood disaster. >> brown: and i'm jeffrey brown. on the "newshour" tonight: we have a newsmaker interview with richard holbrooke-- u.s. special representative to pakistan and afghanistan-- about the crisis and the international aid effort. >> lehrer: then, judy woodruff talks to margaret warner in baghdad about the departure of the last u.s. combat brigade. thousands of american troops left iraq this week, but many still remain.

>> brown: we look at new evidence of oil floating beneath the surface of the gulf of mexico. >> lehrer: special correspondent stuart cohen previews this weekend's elections in australia to determine the country's prime minister. >> brown: and paul solman finds an author and businessman who argues that, despite current hard times, life is getting better and better. >> when we've let people do what they want, when we've let them get on with their lives socially, politically, economically, then prosperity just kind of happens. people get better off. >> lehrer: that's all ahead on tonight's "newshour." major funding for the pbs newshour has been provided by:

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>> lehrer: the situation in pakistan grew more desperate today, nearly three weeks after the flooding began. more than 1,500 people have died and millions are homeless. u.n. and u.s. officials today highlighted the enormity of the disaster saying it now tops the 2004 asian tsunami, the 2005 pakistan earthquake, and this year's haiti earthquake combined. flood victims stand in line for hours at a relief camp, waiting for food and water. >> ( translated ): we are receiving food sometimes, but sometimes we miss out. we are poor people and due to we have small kids and we wonder how will we provide food for them? we don't have any jobs and they are only handing out food once a day. >> lehrer: and there will be more coming into these camps, as thousands try to escape the swollen rivers by any means possible.

water-borne diseases like cholera are a major health risk. in punjab, relatives buried a man who died trying to save his family. >> ( translated ): his son and wife both were stuck in flood waters so he went to rescue them, but the flood waters were too high and the current was strong and that's why he did not survive. >> lehrer: many pakistanis say their government is not doing enough to help them. >> ( translated ): the children have caught diseases. our houses were totally destroyed when the water came. drinking water is not clean, which causes illness to our children. we haven't got anything from the government, we have only one tent to live in. >> lehrer: at the united nations today, the u.s. and other countries pledged more money to speed up humanitarian assistance. >> with a new pledge i am making today of $60 million, u.s. will contribute more than $150 million.

>> lehrer: the international efforts come amid warnings from pakistan's leaders that militant islamic groups are gaining a new foothold by stepping up their aid to the distressed. pakistan's president asif ali zadari raised those concerns today before he and senator john kerry toured some of the worst- hit areas and visited a relief camp. >> there is a possibility that some negative forces will exploit this situation. this need of time, that they will exploit them to their own advantage. >> none of us want to see this crisis provide an opportunity or excuse for people who want to exploit the misfortune of others for political or ideological purposes. and so it is important for all >> lehrer: the u.s. has already deployed 18 army helicopters to pakistan and given other aid worth $90 million. for more on the efforts to help pakistan, here is richard holbrooke, the u.s. special

representative for afghanistan and pakistan. he was at the meetings today at the united nations in new york. >> thank you, jim. >> lehrer: do you believe that the international community now understands how huge a catastrophe this is? >> they started slowly because a flood-- unlike an earthquake or tsunami-- is not an immediate visual after which journalists go in and do great stories on miraculous rescues and immediate need. flood in asia is an old headline and we spent the first few weeks trying to get public attention. today at the united nationses with hillary clinton lead ing all of us and speaking on behalf of president obama and the administration, i think we got a lot more le reg. the japanese are now sending helicopters. hillary raised the amount to $150 million as you just ran in your piece. i would also note that that

figure does not include the very substantial cost of the helicopters, some of which general petraeus sent from afghanistan, others of which were brought in by ship. and we're going to do a lot more. the asian development bank today issued a $2 billion soft loan to pakistan. having said all that, jim, the enormity of this crisis takes a while to sink in. the landmass underwater is larger than italy. and the amount of reconstruction aid is going to be in the billions. so i'm very glad to be able to mention all this. the american public is just beginning to tune in. we have a special phone number, if you text ", is w-a-t" and punch if the number 50555 you send $10 to the u.n. refugee commission. a lot more needs to be done. >> lehrer: say that again mr. holbrook. "swat" and say the numbers again. >> you type in as a text message

in an s.m.s. text s.w.a.t. for swat, that area which is now completely underwater once known as the switzerland of pakistan, swat. then you send it to 50555 and you will be... you will add $10 to your phone bill at the end of the month and you will have sent $10 directly to the u.n. high commission on refugees. all the money goes directly to them and no one has to worry about diversion because it goes to the refugee issues of the u.n. >> lehrer: you mentioned the u.s. effort thus far. what about some of the neighboring countries there next to pakistan? for instance, india. what are they doing? >> the indians have offered assistance. foreign minister krishna called pakistani minister koresh shy they are working out the details now. the indians, like the pakistanis, have dammed holding back these raging rising waters,

more is to come, you know, the monsoon season is still in full force for another few weeks. and we're very worried about those dams because the indians may have to release some water not out of any political reasons but just to hold them from bursting. so that's a big problem. as for the chinese, pakistan's longest, closest ally, so far they have not really made clear what they're doing except that they've taken over some responsibility for the area north of gill gut way in the most remote area which is actually more access to believe china than it is to and i hope china will help a lot. one other point... >> lehrer: excuse me, was china involved in these meetings today at the u.n.? >> they were represented but not at the ministerial level. in fairness to china, this meeting was put together in lee day's, four day's notice and it was hard far lot of foreign ministers to get here. >> but if we... as you speak

now, china has not really weighed in in a heavy way, correct? >> except for taking some direct responsibility for the area way up north they have not made clear what they're doing and i hope they will. the point i want to make sheer is that we all know is that pakistan is important strategically and politically to the u.s. the people are in desperate need, as you pointed out a moment ago. and... but we are not oblivious to the political and strategic implications of it. it's just that we're... president obama, who's issued a statement, the united states government, all of us are just pitching in to do everything we can right now and then we'll let the dust settle and see where we go from there. >> lehrer: lay out those implications, the political and strategic implications. why is pakistan so important

beyond the tragedy itself? >> reporter: pakistan is important in and of itself because it test second-largest muslim nation in the world, because it's a nuclear power neighbor ago nuclear power which it has fought three wars with in the last 40, 50 years, that's india, of course. because on its western border lurk and hide the taliban, al qaeda, and other very dangerous groups which threaten american troops, threaten our homeland and by the way that scenario which has been flooded... that's an area which has been flood sod we don't know what's going on up there. and because no outcome in afghanistan will be successful unless the pakistanis are part of the solution not part of the problem. all of that, of course, you and i have discussed several times before on your program going back five years. so i need to underscore that today we're doing what we're doing for pakistan out of pure humanitarian need. there's one other point i'd like

to make which is extremely important and it was made today by both the foreign minister koreshi and dr. rajiv shah, the head of u.s.a.i.d. at the asia society conference this morning of n.g.o.s. they both said that this was a manifestation of global warming. that the melt off the himalayan glaciers, both... they both thought it was possibly linked to the fires outside moscow and dr. shah said very clearly that he thinks the world should expect more of this kind of event. i know that sounds almost like a science fiction movie. but i think it's worth your view ers recognizing that we're at the... we may be in the process of seeing a dangerous new trend. i'm not sure about that. our focus tonight is emergency rescue and relief. but i thought that's important to mention. >> lehrer: but meanwhile, the strategic and military and

political issues that are out there in that area, specifically pakistan, afghanistan, et cetera, are on hold right now while this tragedy and this disaster dealt with ? >> well, i think more accurately... i would prefer to say that we're dealing with the problems of pakistan by dealing with the single most important. 20 million people are in danger, thousands of lives have been lost, all the bridges have been washed out in parts of the country. the cotton crop is gone and textiles are their only major export. the electrical grid is in danger, cholera is spreading. this is... this goes from crisis to emergency and the obama administration is leading the effort and the world is beginning to respond, we have a long way to go. >> lehrer: how far do we have to go? what more need to be done and need to be done quickly ?

>> first save lives, first emergency relief which means food, clean drinking water to prevent the spread of cholera and other water-borne diseases. then tents, housing, and after that what the waters finally recede, we'll have a better sense of what the reconstruction bill is. and dr. rajiv shah is going out with the president and secretary clinton's instructions sunday with members of my team to work on the needs assessment. >> lehrer: okay. richard holbrooke, thank you. we're going to put that on the screen, we're going to put up the number you gave us earlier as we go, all right? >> well, thank you so much for doing that, jim. it's a cause all americans and particularly the pakistani american community i hope will rally to. >> lehrer: thank you, richard holbrooke. >> thank you. >> brown: still to come on the "newshour": the last u.s. combat brigade leaves iraq; the oil still in the gulf of mexico; the elections in australia and an optimistic view of the economy. but first, the other news of the day. here's hari sreenivasan in our

newsroom. >> sreenivasan: wall street traders reacted badly to a disappointing jobs report today. the labor department announced initial claims for unemployment rose last week to half-a- million. that's the first time since november they've reached that level. that news helped send the dow jones industrial average down 144 points to close at 10,271. the nasdaq fell more than 36 points to close at 2179. in washington, president obama said the new jobless data underscores the critical need for congress to pass a stalled jobs bill. he urged republican leaders to stop trying to block it. >> there will be plenty of time between now and november to play politics. but the small business owners i met with this week, the ones that i've met with across the country this year-- they don't have time for political games. they're not interested in what's best for a political party. they're interested in what's best for the country. also today, the non-partisan congressional budget office estimated this year's federal deficit will exceed $1.3

trillion. that makes it the second highest dollar amount ever, behind last year's $1.4 trillion deficit. a white house spokesman insisted today president obama is a christian who prays on a daily basis. that came on the heels of a pew research center survey that found nearly one in five americans, or 18%, believe the president is a muslim. that was up from 11% who believed that in march of 2009. the survey was conducted before the controversy over the building of a mosque near the world trade center site in new york. a salmonella outbreak in eggs has sickened hundreds and prompted a recall of more than 380 million eggs. cases have been confirmed in california, colorado and minnesota. and investigations are underway in at least 10 other states, as well as at the farm that's believed to be the source. the eggs come from wright county egg farm in iowa, but are sold under more than a dozen brand names around the country. we have a list of the brands and carton numbers to look for on

the "newshour" web site. a federal grand jury indicted former major league baseball pitcher roger clemens today for lying to congress. the indictment stems from clemens' testimony two-and-a- half years ago, before the house committee on oversight and government reform. >> someone isn't telling the truth. >> sreenivasan: the 23-year veteran of the red sox, yankees, blue jays and astros came before congress accused by his former friend and athletic trainer of using performance enhancing drugs. it was an allegation the hard- charging texan, who last pitched in 2007, forcefully denied. >> i have been accused of something i'm not guilty of. let me be clear, i have never taken steroids or h.g.h. >> sreenivasan: clemens was prominently named in a 2007 report on drug use in baseball authored by former senator george mitchell. that report named nearly one hundred major league players. neither clemens nor his attorney a federal grand jury in washington handed down the

charges of perjury, making false statements and obstruction. if convicted, clemens faces a maximum 30 years in prison and a $1.5 million fine. clemens now joins another once- sure bet for the hall of fame: barry bonds. baseball's all-time home run leader faces trial in march on similar perjury charges, which allege that he, too, lied about his steroid use to federal investigators. no date has been set for clemens' initial court appearance. in afghanistan, the u.s. military announced another american soldier died in the south yesterday. at least 16 u.s. service members have been killed so far this month. and also in the south, taliban militants attacked a road construction crew in sangin district. it was unclear how many people were killed, because the fighting was ongoing. those are some of the day's major stories. now, back to jim. >> lehrer: a symbolic moment in the american war in iraq.

judy woodruff has that story. >> good job guys. way to go! >> woodruff: a sense of relief in the desert evening wednesday, as the 4th stryker brigade of the 2nd infantry division crossed into kuwait-- the last full combat brigade to leave iraq. >> best part of getting back to kuwait? one, i know no one else will get hurt, and two, i'm going home. >> woodruff: they shed their body armor and helmets, unloaded their weapons and posed for pictures. >> i didn't get to have anything to do with the initial push into iraq, but we got to close it out >> woodruff: that initial push came seven years and five months ago, march 2003. massive aerial bombardment-- shock and awe-- began as tens of thousands of troops sped north to topple saddam hussein. the 4th stryker brigade named for its lumbering battle vehicles lost 34 soldiers in a war that has killed 4,415

american personnel, by some estimates, 100,000 or more iraqis and cost upwards of a trillion dollars. in short order, "operation iraqi freedom" becomes "operation new dawn" as the american combat mission begins another transition. earlier today, i talked to margaret warner in baghdad about these troop changes. margaret, it's good to seej- ou. we've just seen these pictures of american combat troops leaving iraq last night, but, in fact, margaret, that is process that's been under way for some time? >> yes, absolutely. as you recall, president obama when he took office are promised that he would get u.s. troops down to the 50,000 level by the end of this month, on their way to full exit from the country by the end of next year, as the bush administration had agreed. so they've been really doing this especially an accelerated way for the last several months.

they had to get 95,000 troops out of the country from the high when the president took office. the pentagon decided not to let it end with a whimper but rather to actually stage a highly symbolic exit. so they invited journalists to ride along with this last convoy of what's called dedicated combat troops, or dedicated combat brigade as it made its way from camp victory near the baghdad airport near here all the way down to the kuwait border and into kuwait, really right along the route that some of the u.s. forces had used when the u.s. invaded iraq seven years ago. >> woodruff: now, you mentioned there are 50,000 forces still in iraq. who are they? >> well, judy, 20,000 of them are brigades only they're being called advise-and-assist brigades but they have fulledly same fighting capabilities as the striker brigade that left last night. and the hope is that on the way

between now and next december or december a a year and a half hence that they will be mostly advise, assisting, training the iraqi forces. plus there's considerable u.s. intelligence, logistical and airlift support, things that the iraqis still aren't able to do themselves. but these forces, these brigades that remain plus another 5,000 special forces, counterterrorism forces who have not been withdrawn at all will still remain a very potent military presence in this country. >> woodruff: and, margaret, where are all these troops deployed? >> that's an interesting question because i've been here five days and i have not seen one u.s. soldier in baghdad except in the green zone where there is a u.s. base. that is, there are no u.s. convoys on the streets, not even in the highways outside. there are no u.s. helicopters overhead. the remaining u.s. forces are really in outlying areas, they

left the cities a year ago. now, with this reduced number, they are being reconfigured and there are going to be three divisions: one in the north base of tikrit, one in central, as it's called, camp victory, and one in the south at basra. each one of them will have two brigades, each the same size as the striker braid that left last night. >> woodruff: just how stable is the security situation there? >> well, that's the question i've come here to look at. there's no doubt the trend line is down, the number of attacks on civilians is way down and, of course, the number of attacks on u.s. troops are way down because there aren't a lot of u.s. troops out there in visible positions. but there has been an upswing in recent weeks. for example, looking at the country as a whole in the first week of august there were some 125 civilian deaths. now, that was up pretty sharply from the 75 a week that was the average in july.

and just to make it more particular, today we went out to fallujah which, as you know, was a real hotbed of the suny insurgency, the u.s. fought two protracted battles there, they called them the battles of fallujah in 2004 and we went there first of all with our own protection, we were advised to have police protection when we got to the outskirts of the city. the city is still very much cordoned off. and we went to see the sheik who is essentially the city council chairman and i asked him the question you just asked me and he said "we really have a good handle on this. in 2008 this was one of the safest cities in anbar and in 2009 it was in good shape." but he said "in the last two and a half months, that security is being breached" and they have had i.e.d. attacks, they've had attacks on police force members, he suspects some members of the police force of being involved.

and so when we talk about well there's been a slight upswing, if you're on the receiving end of that slight upswing-- as the iraqis are-- that still makes quite a difference. so iraqis, there is no doubt, are feeling a littleless secure than they were, say, three months ago. >> woodruff: all right, margaret warner in baghdad. thank you. and margaret, we'll look for your reports in the days to come. >> thanks, judy. >> brown: now, new evidence of oil beneath the surface of the gulf of mexico and questions as to whether a government study underplayed the extent of the problem. the results of the federal study were unveiled earlier this month. it found just 26% of the roughly 200 million gallons of oil released from b.p.'s ruptured wellhead remained in the gulf of mexico. >> the vast majority of the oil has either evaporated or been burned, skimmed and recovered from the wellhead, or dispersed. >> many of the doomsday scenarios that were talked about and repeated a lot have not and will not come to fruition.

>> brown: but two weeks later, some scientists are taking issue with those findings. speaking at a house hearing today, florida state university's ian macdonald questioned the government's methodology. and said he believes more oil was released and remains in the gulf than has been acknowledged. >> this oil is going to be in the environment for a long time. i think that the imprint of the b.p. release, the discharge, will be detectable in the gulf of mexico environment for the rest of my life. >> brown: on tuesday, researchers from the university of georgia reported that as much as 79% of the oil spilled from the deepwater horizon rig remains in the waters. >> my suspicion would be that a large fraction of this oil is still in the system. >> brown: university of south florida scientists also reported this week finding microscopic droplets of oil along the sea floor, which could have a toxic effect on the smallest organisms in the marine food chain.

>> these waters showed a very clear phytoplankton and community health that was poor. >> reporter: today, researchers from the woods hole oceanographic institution released the first conclusive evidence of an underwater plume of oil from the spill. their work was released in the journal "science." they identified a 22-mile-long invisible mist of oil found in june, half a mile below the surface. for her part, jane lubchenko, the head of n.o.a.a., said at a press conference in louisiana this afternoon that, for now, she stands by the government's estimate. >> we believe those numbers remain to be the best numbers that are out there. we will continue to monitor very aggressively and to implement the directive that admiral allen last friday to initiate a very

blitz krieg monitoring in the gulf to really better characterize where the sub- surface oil is and at the rate of which it's biodegrading. >> brown: meanwhile, at the site of the spill, officials plan to replace a failed piece of equipment called the blowout preventer on the wellhead. the final plugging of the blown- out well will now begin sometime after labor day. we take a closer look now, with: chris reddy, a marine geochemist at woods hole oceanographic institute and one of the authors of today's study on mapping the underwater plume. and david farenthold who's been covering this story for the "washington post." chris reddy, why don't you start by describing what it is you found. >> the last two weeks of june i went out on a research cruise and we plot... tracked a plume of oil that was about 22 miles long and about 1.2 miles wide. and it's amazing results because we all think oil floats. so why is there a plume? and certainly that was what we were investigating is why there s there a plume?

but we first had to figure out if there was one because there was some conjecture at that time and we feel pretty confident that we've found, identified, and the shape and the size of the plume. >> brown: describe the plume. because from what i gather, it's not something one can see or feel. >> no, in fact, i collected most of the samples physically and looked at them. it looks like spring water. but that doesn't necessarily mean there's no... the level of chemicals isn't harmful. but it's certainly not hershey syrup. the concept of this rolling amounts of black death rolling through the middle of the ocean is... that's not what... visually what it is. it's just levels of oil compounds that are higher than its neighboring water. >> brown: now you found this in june. where would the plume be now and how much oil would you expect to still be there? >> there reis r good questions and these are things we continue to work on. certainly plume where we were, which was only a few miles away from the well head and out...

from where the riser pipe was, is no longer there because it's moved away and the faucet has been closed, per say. but if we don't know where that oil that we were keeping such a good eye on in late june is right now, we would like to know, but we haven't had a chance to chase it. >> brown: well, how hard is it to continue to track? >> well, the farther you get away from the source, the harder and harder it is to find. it has a chance to meander and move from one place to another, go up or go down a little. it's a lot harder than you think. the gulf of mexico is big. it's not an easy challenge. >> brown: david farenthold, let me bring you in here. we have reported on several studies coming out in the last week. is there a dispute over displacement versus breaking down oil? what do you see going on? >> to me the government's report at the beginning of this month that you showed some clips from, that answered the central mystery of this spill.

this is not the exxon "valdez," as chris said, where all the oil floats on the surface. a lot of the oil was underneath the surface. the question was what became of it? so that was just a mystery. then there was a pie chart. the government came to us with this pie chart and said here, we mow what happened to all the oil. we've estimated it and it looks like okay, a lot of it is missing. it's underneath the water but our calculations show the oil you can't see is still not much of a problem because a lot of it is degrading rapidly. the question now is were they right? is the oil we can't see really either gone or on its way to being gone? that's what the reports in the last few days have questioned and what the findings of chris' team raise question about the speed at which microbes in the gulf are eating the oil we can't see. >> brown: and what are the others seeing? fill in that picture a little bit that allows them to say that the government may be underestimating this. >> well, one of the studies is by the university of georgia and they didn't actually do any of their own research. they basically ran their own clal collations based on the government's anymore beers and

they just made more pessimistic assumptions about what became of the oil. they also tried to sort of narrow the picture a little bit. the government's report counted as part of the whole a bunch of oil that never spilled into the gulf but instead was siphoned to the surface. so the university of georgia scientists just ran their own numbers, put a different conjecture on this data than the government did and came up with a more depressing picture. the university of south florida, they actually did some research out in the gulf and what they did was went down into a deep campion near florida and found what they believe to be but haven't proved to be oil on the bottom and evidence that the oil in the water wassing to stick to these tiny creatures at the base of the marine food chain. >> brown: chris reddy, where do you and your team come down on the extent of the problem? >> i'm going to speak personally as somebody who studies oil spills. these estimates that are coming out, they are estimates, and they're not the end. you know, these estimates are going "time" prove and get more refined with time.

the government has collected many outstanding samples that... around the gulf and when these samples are finally analyzed and it's not because of the government being lackadaisical or anything like, that it just takes a long time to get good data. it's not like these t.v. shows. once you have this data, you not only will know how much oil is in a certain location but, you know, oil changes the second it hits the water and each compound that makes up that oil has a little different personality and so what you can do is you can essentially interrogate a sample and it will tell you a lilt bit more about whether this sample has had more microbes eat it or whether it's been evaporated more. and so for me this is patience is a virtue. samples will come in and, you know, if i was going to get this data, i'd have a cup of coffee and a pen and a paper and be working on this as it goes. but scientists... science is incremental. >> brown: does the work you do

also tell you how much damage it is doing or can do? >> so when you want to think about damages to the wildlife, it's often thought about in a simple way as to the concentration of certain compounds and duration. so how long something may be exposed to. and those are numbers that have to be put into the calculus of it has to be worked out and that's part of the natural resource damage assessment. it's not easy. there's nothing really ease any this spill. >> brown: david, what sells going on to... what else is going on to determine the level of damage or polls damage. >> there's a huge effort going on trying to determine the writ large damage to the gulf of mexico's damage to the ecosystem. that's going to be in terms of how much punishment b.p. faces. other scientists are looking at marsh lands and crabs. one of the harder pieces of this, though, as difficult as it is to find out what's going on

in tiny crabs in a marsh in louisiana, think about how difficult it is to understand what these plumes or dispersed amounts of oil are doing thousands of feet below the surface of the gulf where they'll affect things like whales and squid, deep water coral, things that scientists have trouble seeing in the best of circumstances. it's very hard to understand what this dispersed oil might be doing in those places. that, to me, has always been one of the big questions about the impact of this spill and it continues to be . >> brown: david, very briefly, i assume this also matters because of the question of paying for and dealing with the problem overall. >> of course, and that's a difficult question no matter what. you'll see in the next few years the government trying to get money back from b.p. for the damage. but you're also going to see people trying to figure out well, what did it do the shrimp industry? what did it do to the red snapper industry? are those people owed compensation by sphwheep this ises that complicated situation, it would have been a complicated system no matter what, even if t oil had floated on the surface like we thought. now it's underneath the surface and it makes it difficult to

understand what it did to the gulf. >> brown: david farenthold and chris reddy, thank you both very much. thank you. >> lehrer: now, australia, where the economy is booming but it remains the central issue in saturday's elections for a parliament that will chose a prime minister. we have a report from special correspondent stuart cohen. >> well, i'm up for re-election on the 21st of august. i'm going to be asking for your support. >> reporter: labor party candidate david bradbury is on the hustings, as australians say. he's campaigning for re-election to his parliamentary seat in sydney's sprawling suburbs. like most americans his constituents are worried about the economy, but not because australia is suffering through the global financial crisis. >> the challenge for us is to demonstrate to people that the reasons why we're able to steer the economy through the global financial crisis were because of the economic activity that we stimulated through government

policy. >> reporter: bradbury's conservative party challenger is fiona scott. in a sign of just how tight the race for this seat is, they work this shopping mall in shifts. when one heads off, the other takes over. >> i believe people out here, and they're showing out here, are very passionate about the things that they're dealing with everyday. the things that are hurting their own back pockets. things like the cost of living. seeing our infrastructure out here starting to fail. >> reporter: with an unemployment rate just over 5%, australia's economy is still booming, thanks to continued mineral exports to places like china. it was also government spending that helped keep australia out of recession. but it put the budget into a relatively small deficit for the first time in more than a decade. that's pushed the economy out front as the major issue in this campaign, even though the deficit, as a percentage of the economy, is barely a third of that in the u.s.

>> the big and searing experience was that when there was a global financial crisis and suddenly countries everywhere were in trouble, the australian government had enough money in the kitty, that it was easily able to enact a massive stimulus, massive at least in proportion to out economy. consequence is, one of the only countries in the world that didn't have a recession, and this experience has now been burnt into the national consciousness and it's put a real premium on getting back to surpluses as quickly as possible. >> reporter: all 150 members of australia's lower house, the house of representatives, and half of its 76 senators are up for election. because of the peculiarities of australia's electoral system, third parties abound in the senate and neither major party holds a governing majority. so the big fight is over the lower house, where the leader of the majority party becomes prime minister. it's places like this where australia's election will be decided.

the seat of lindsey, here in sydney's far western suburbs is considered a bellwether. it belonged to the country's conservatives under former prime minister john howard but swung to the labor party when kevin rudd swept to power three years ago. the conservatives need just 17 of these so-called marginal seats in order to take control of parliament. people in this key district know their votes could ultimately decide who becomes prime minister. but many still havent made up their mind yet, either about their local candidate or the party leaders. >> i vote for the person not for the party. we'll leave it at that, on that one, that issue. i'm still sitting on the fence, believe it or not. i've got one particular local candidate here that i'm, sort of, a bit more partial to than the other, but, yeah. >> i think for many people, they're looking at which ones going to be the least worst prime minister. it's not much to choose from, really. >> reporter: the labor party leader is julia gillard. she made history just a few

weeks ago by becoming australia's first female leader, after the unprecedented move of ousting her party's sitting first-term prime minister, kevin rudd. the party's poll numbers had plummeted as rudd made a series of unpopular decisions on taxes and climate change. labors rank and file feared an election drubbing. when the newly installed gillard called the election five weeks ago, labors numbers had bounced back and she was looking like a shoe-in. but her honeymoon was short- lived. >> and the reason is because julia gillard was not the honey that the voters thought she was. the voters who had some sort of sense of hallelujah and rushed to her were progressive voters and they made the labor party's look terrific for a few days. but day by day, decision by decision, those voters realized that they'd made, it was a case of mistaken identity. they discovered that julia gillard was actually very conservative within the labor spectrum. >> reporter: gillard's challenger is tony abbott, leader of australia's conservative party, which confusingly is actually called the liberal party. while gillard is also the

country's first declared atheist prime minister and in a so- called de facto relationship with her live-in boyfriend of three years, abbott is a practicing catholic who almost went into the priesthood. he has three daughters and early on portrayed himself as the traditional family candidate. he's also a climate change skeptic, who toppled his own party leader just a few months ago, over a disagreement on climate change legislation. dr. geoff gallop is head of the graduate school of government at the university of sydney. >> both tony abbott and julia gillard haven't been leaders for a long time, so there's a lot of debate about whether or not they can be believed in what they're saying. whether or not they're expressing their true beliefs or whether they're just compromising in the interests of the short term election process. so i think there's quite a lot of debate about that. please make welcome prime minister julia gillard and opposition leader tony abbott. >> reporter: at their one and only debate, both leaders set a contentious tone for the campaign, but on issues that have since faded. >> julia gillard can't talk

about her record, because things have gone from bad to worse since she took over. there's the boat people fix that got lost somewhere in the timor sea. and there's the climate fix which is just another talkfest. >> i'm an optimist and i believe we can work our way to a community consensus about putting a cap on carbon pollution and designing the market based mechanism that will support that. now we had a consensus in parliament house, and obviously tony became opposition leader and ended that consensus and the rest, as we all know, is history. >> reporter: but it was the ousting of kevin rudd just three weeks before the start of the campaign that has remained as raw for many voters as it was for rudd the day he stepped down. >> what i'm less proud of is the fact that i have now blubbered. no political party has ever politically assassinated a prime

minister in his first term before, so we didn't really know how it would play out. the effect has been, though, that kevin rudd's ghost has haunted this campaign and 69% of voters say that they disapproved of the way he was treated. you can't get 69% of voters to agree on anything, normally. so that's been a strong factor. >> reporter: in the last days, the polls have swung back in favor of the labor party. some say this is now julia gillard's election to lose. but she's not taking anything for granted. >> i think it's going to be a nail-biter of a saturday night. i think this is going to be one of the closest races the nation has ever seen. >> reporter: no matter who wins, one thing seems certain-- the future of the american relationship. >> one of the tenants of australian foreign policy is that both parties are deeply committed to the u.s alliance and as a part of that, an expression of that, both are also deeply committed to deployment in afghanistan. >> reporter: voting is compulsory in australia. around 95% of registered voters are expected to turn out when

polls open across the nation saturday morning. >> lehrer: finally tonight, with bad news coming daily, including today, "newshour" economics correspondent paul solman has a case for some optimism over the long haul. it's part of his ongoing reporting on "making sense of financial news." >> reporter: defying the economic unease of the past few years and weeks, british zoologist, best-selling author and one-time bank chairman matt ridley. the pessimists have got it wrong, he says. for more and more humans, life on earth has just been getting better and better for eons. ridley's new book, "the rational optimist," dates our happy history back to hunter gatherer society and a fateful economic invention of the stone age. >> human beings have been making tools for about two million

years and for a long time all they made was simple stereotype stone tools like this and then suddenly in the last 50,000- 100,000 years they started making more and more sophisticated things until they had things like this. and i think the answer lies in exchange and specialization. when our species invented exchanging, it was as if ideas started having sex because in biological evolution sex brings together genetic mutations, it diversifies the gene pool, and the same thing is true of exchange in cultural evolution, it brings together ideas that different people have had. >> reporter: except for the references to sex, the talented mr. ridley is a throwback to 18th century optimism and adam smith, who wrote that exchange is the cause of the wealth of nations. >> give me that which i want and you shall have this which you want. >> reporter: you specialize through the division of labor; you get better and faster at making what others want, you get more in return.

it's an idea so powerful and durable, it's printed on england's 20-pound note. >> that's what we're always striving for, is to be able to afford more goods and services, to be able to afford to have other people do things for us, and that's as if it were the thing that's been inexorably increasing over history particularly in the last 200 years. >> reporter: the exchange of goods, services and ideas about how to produce more efficiently has delivered humanity from the limits of old. >> so you'd never get this many people living in an area this size in hunter gatherer societies because it took a huge acreage to support a hunter gatherer tribe. each person needed about a 1,000 hectares. that's three central parks. the invention of agriculture, particularly the invention of intensive modern agriculture enables us to support these incredibly dense populations we have. >> reporter: and modern agriculture is a story of increasing specialization, which, as a pencil famously shows, increases cumulative collective knowledge.

>> look at this lead pencil. there's not a single person in the world who can make this pencil. >> reporter: that's nobel laureate economist milton friedman in his "free to choose" p.b.s. series from the '70s. with an example, i borrowed for an economics teaching video made just a few years ago. >> the wood is usually california cedar. the eraser made from south american rubber and italian pumice stone. >> reporter: the pencil is just one easy example of knowledge run riot. >> and that knowledge is not in anyone's head. it's distributed through thousands of different heads all over the planet. >> reporter: specialization and exchange says ridley, "they've brought us all pencils; enabled us all to munch like monarchs." >> louis xiv of france in the 17th century had 498 people to cook his dinner for him. he was rich. okay? but everybody's got 498 people to cook their dinner for them now. look, you can go to any one of these restaurants, you can go to 400 restaurants around here, you can go to the blue water grill

which is one of the fanciest restaurants in town, and they're all ready to cook for you at a instant notice. so we've got hundreds of people >> reporter: moreover, says ridley, specialized technology has, time and again, solved its own problems. >> when people depended on horse carriages to get around the manure was everywhere. the transport was slow. it was cruel. it was painful for the horses. a lot of horses died. getting them off the street was a problem. >> reporter: but cars? exhaust? global warming? noise? car accidents-- 30,000 to 40,000 people a year die in this country alone from cars? >> cars though are wonderful. they're liberating. they let people live their own lives, go where they want, they're extraordinarily cheap, they're amazingly quiet considering. haven't solved all the problems yet as you pointed out, its carbon dioxide, etc. but we are actually incrementally solving these problems, we're getting cleaner about the way we make our energy.

>> reporter: perhaps the rational optimist's favorite gotham vantage point was the staten island ferry. and its view of ellis island, through which so many immigrants came to america a century ago. we've come a long way since. >> the change in human living standards over the period since ellis island was at its peak is quite extraordinary, nine times as much per capita income all around the world, twice as much lifespan. and lifespan keeps increasing, though, sadly for us, and those of you watching, we haven't yet reached the longevity of lady liberty, 124 this year. and one of ridley's favorite icons of progress. for me, that symbolizes everything that has been incredible about this country in particular and the world in general for 50,000 years, which is when we've let people do what they want, when we've let them get on with their lives socially, politically, economically, then prosperity just kind of happens. >> reporter: happens, says ridley, by specializing in ways often unimaginable. how many hours a day do you do

this? >> one, two, three, four, five, six, seven, eight! >> reporter: eight hours a day? >> yes, sir. >> it's a way of making a living, it's a way that wouldn't have worked in the stone age when we're all busy providing ourselves with food, shelter and clothing. we didn't have anything to spare to give these guys a living. >> reporter: to ridley, more proof of the inevitable march of progress. others in battery park weren't so sure. >> i think were the last generation to have it good. we've consumed too many resources and our technology is going to screw us so that will be the end of it. eventually, we'll just create computers so complex we cant can't understand them anymore and they self-replicating and then before you know you have terminator marching around the world and it will be the end. >> reporter: these lunching ladies from swaziland were skeptical too. >> you're always giving up something, right? so, for instance, we have better infrastructure but now have pollution so there's always a balance. we get something, we lose something. >> we really consider culture very important and with advancement of technology,

globalization, we're having to let go of so much more, and our values are having to change so much more to be able to accommodate outside cultures and understandings and in some ways its not really working out for its not really working out for some of us in third world countries as well as its working >> reporter: and even in first world countries, is all really well? in fact, ridley's own optimism might surprise some, given that he helped run british bank northern rock, taken over by the government in 2008 after bad loans led to a run and bankruptcy. >> that experience was very traumatic for everybody involved, and we should have been more aware of the fact that asset markets, financial markets are capable of creating bubbles and busts in a way that markets in goods and services don't. >> reporter: okay, time for one last question, which prompted a surprisingly sobering answer. let's assume you're right. in the long-run, onward and upward but at the moment governments like ours, yours,

europe's, have bailed out institutions that took enormous risks and we're going to pay for that in the future because we borrowed against the future as opposed to investing in our future, no? >> i think that's a fair point and i think it's clear that we have been borrowing too much in the west. it's not entirely wrong to borrow against the future because the increase in human prosperity enables the future to be in a position to pay it back and you can invest in the things that enable it to pay it back but yes, in the west we've overdone it. the rest of the world hasn't so much though and so i think its quite possible that you will see an increase in prosperity globally even if the west loses ground. >> reporter: prosperity launched long ago by specialization and exchange which, in the long run ridley insists, have yet to let us down. >> lehrer: again, the major developments of the day:

u.n. and u.s. officials said the flood disaster in pakistan now the last full u.s. combat brigade left iraq, as the mission shifts from combat to assistance. and new scientific studies the "newshour" is always online. hari sreenivasan, in our newsroom, previews what's there. hari? >> sreenivasan: you can ask questions of matt ridley and watch paul challenge ridley's optimism in a web only video. that's on our making sense page. we look at health problems posed by the pakistan floods. see a slideshow narrated by a unicef official who describes efforts to combat the spread of disease and read more about today's report on the size of an undersea oil plume and find all of our coverage both on-air and online about the gulf disaster. all that and more is on our web site, newshour.pbs.org. >> lehrer: and again, to our

honor roll of american service personnel killed in the iraq and afghanistan conflicts. we add them as their deaths are made official and photographs become available. here, in silence, are eight more.

>> brown: and that's the "newshour" for tonight. i'm jeffrey brown. >> lehrer: and i'm jim lehrer. we'll see you on-line and again here tomorrow evening with mark shields and michael gerson, among others. thank you and good night. major funding for the pbs newshour has been provided by: and by the alfred p. sloan foundation. supporting science, technology, and improved economic performance and financial literacy in the 21st century. and with the ongoing support of these institutions and foundations. and...

this program was made possible by the corporation for public broadcasting. and by contributions to your pbs station from viewers like you. thank you. captioning sponsored by macneil/lehrer productions captioned by media access group at wgbh access.wgbh.org